Bloomberg News

Funds Threaten to Quit Norway in Tariff Backlash: Nordic Credit

Creditors are teaming up with
equity holders in threatening to stop investing in Norway if it
goes ahead with a proposed cut in gas infrastructure income.

Western Europe’s biggest oil and gas producer unveiled
plans in January to cut tariffs on its Gassled pipeline by 90
percent. Investors behind the venture estimate the decision will
reduce their income by about $7 billion. While the government
has so far mainly fielded complaints from shareholders,
creditors funding Norway’s infrastructure may now also
reconsider their commitment, according to Export Development
Canada, which provides loans to support Canadian trade.

“The proposed tariff reduction on Gassled, if implemented,
would have a far reaching impact on our desire as external
finance providers to fund additional Norwegian projects,”
EDC said in a letter to Norway’s oil minister, obtained by
Bloomberg News. “This could be felt not only in the energy
sector but also in other sectors, thereby increasing the net
cost of these projects.”

Norway’s gas tariff dispute is turning into a replay of its
snub to credit markets 1 1/2 years ago, when the Industry
Ministry decided to wind down Eksportfinans. The lender, created
half a century earlier to fund Norway’s exports, lost government
backing after European capital rules forced it to limit its
loans. The move triggered junk ratings at Standard & Poor’s and
Moody’s Investors Service, and forced losses on creditors
holding about $39 billion based in Europe, Asia and the U.S.

Eksportfinans Yields

While the government’s treatment of Eksportfinans initially
sent yields surging, its bonds have since recovered. The yield
on the lender’s 3 percent note due November 2014 eased to 3.24
percent this week. The yield on Norway’s 2 percent government
bond due 2023 rose to 2.19 percent yesterday, from 2.06 percent
at the end of last week.

EDC, along with Guardian Life Insurance Co. of America
and Unum Group, funded Gassled investor Solveig Gas Norway AS
when it acquired a stake in the pipeline system. That followed
divestments in Gassled by Statoil ASA (STL) of Norway, Royal Dutch
Shell Plc (RDSA), Exxon Mobil Corp. and Total SA.

Government Response

The Oil Ministry has brushed off the investor criticisms.
Lars Erik Aamot, head of the ministry’s oil and gas department,
said in a February interview that what investors have “paid
isn’t relevant to our policy,” adding he doesn’t know “what
expectations they had for returns.”

The government of Prime Minister Jens Stoltenberg argues
the cuts will help make gas discoveries more profitable and
boost recovery rates. Norway’s proposed tariff reduction affects
gas volumes contracted after May 1 for the 7,800 kilometer
pipeline network.

“This could have a lasting impact on the cost and
availability of funds to finance future infrastructure
investments in Norway,” EDC said.

Moody’s Investors Service and Standard & Poor’s have both
warned they’re considering downgrading the debt of Solveig by
more than one level on concerns the tariff cuts will hurt
revenue and make refinancing of existing debt more difficult.

Solveig’s other debt investors have also expressed surprise
at Norway’s decision, which they argue will hurt cash flow.

‘Negative Impact’

“We are concerned that this proposed change represents a
new type of regulatory dynamism in Norway that could have a
lasting negative impact on the cost and availability of future
funds to finance infrastructure investments” there, Ben Vance, a senior managing director at Provident Investment
Management LLC, a unit of Unum Group (UNM:US), said in a March 15 letter
obtained by Bloomberg. The Chattanooga, Tennessee-based insurer
lent $49 million to Solveig, according to the letter.

“We would like to add to our Norwegian bond exposure over
the coming years,” Vance said. “However, if the new pipeline
tariff structure is implemented as currently proposed, we would
need to revisit our future investment plans in the country as
our confidence in the country’s commitment to stability and
fairness will have diminished.”

Barry Scheinholtz, a senior director at Guardian Life
Insurance Co. of America, wrote that the policy reversal
“could have a negative impact on our desire to participate in
future financings of Norwegian projects,” according to a March
14 letter obtained by Bloomberg.

Norway Critics

Criticism has also come from inside Norway’s investor
community. The country’s state-run pension fund, which bought
bonds from Njord Gas Infrastructure AS in 2011, said in a March
15 letter that it would reconsider infrastructure-related
investments should the proposal be enacted.

As the government prepares its final ruling on the Gassled
tariffs, investors including Solveig and Njord are threatening
to turn their backs on future projects, including buying out oil
companies that are spending 25 billion kroner on the Polarled
pipeline, a new link from fields in the Arctic.

Norway should reconsider the tariff proposal and realign
its interests with “those of the Gassled investors and debt
providers with the ultimate goal of supporting further
development of the Norwegian infrastructure projects,”
Scheinholtz said.

To contact the reporters on this story:
Stephen Treloar in Oslo at
streloar1@bloomberg.net;
Mikael Holter in Oslo at
mholter2@bloomberg.net

To contact the editor responsible for this story:
Christian Wienberg at
cwienberg@bloomberg.net